How Trump’s election has thrown the tax credit capital market for a loop

Todd Crow | Courtesy of The Affordable Housing Tax Credit Coalition

On Election Day 2016, Todd Crow, an executive vice president with PNC Bank, was flying from Atlanta to Las Vegas. When he boarded the plane, Democratic candidate Hillary Clinton was the presumptive winner.

Crow is executive vice president and manager of tax credit capital for PNC Real Estate, and his job is to raise equity from institutional investors and invest that money into real estate, particularly affordable housing projects across the country.

“Any part of the real estate capital markets, or other capital markets for that matter, that are involved in capital aggregation, capital formation to invest, those capital markets hate nothing worse than uncertainty,” he said. “We can make our business work in high growth, in a period of low growth, in a period of high unemployment or low unemployment, a period of high interest rates or low interest rates — what we struggle with is uncertainty, rapid change or the threat of rapid change.”

And the election of Trump as the president of the United States created a lot of uncertainty.

“The next day I started getting questions, ‘What will this mean for our business?’ and specifically, about tax reform,” he said, adding that some investors left the tax credit capital market and others started asking for “significant increases” in promised returns on investment.

Trump’s current plan would reduce the corporate tax rate to 15 percent from 35 percent. As the corporate tax rates decrease, it increases the cost of the financing a project through debt and raises the cost of the project, which can diminish returns.

“Whatever your view of that is, good or bad, achievable or not achievable. It sent a rippled through the capital markets, and it caused capital formation to slow down,” Crow said.

PNC Real Estate is the second-largest owner of apartments in the United States, according to the National Multifamily Housing Council. This year, his division of PNC Real Estate has committed $400 million in investment in projects, and almost all of the contracts include complex language related to the uncertainty around Trump’s tax reform plan.

Also, money that could be invested in projects isn’t being invested because of concerns of what may come.

“It’s very disruptive,” Crow said. “It almost doesn’t matter what tax reform would look like, as long as they just pick one and bring some certainty. The uncertainty of what could possibly happen is worse even than the certainty of a bad tax code.”

Back in October, Crow told the group, he would have said that the United States was in the healthiest investor market he’s ever seen in his 25 years. Now things are, well, uncertain.